Circle Stock Overvalued Despite Coinbase Ties Warns Hayes

Arthur Hayes, a prominent crypto analyst, has issued a warning about the potential risks associated with stablecoin-linked IPOs, particularly focusing on Circle and Coinbase. Hayes highlights that while Circle, the second-largest asset-under-custody stablecoin issuer, has seen significant trading success, its stock may be overvalued. He notes that Circle's market capitalization represents 39% of Coinbase’s valuation, despite Circle paying 50% of its interest income to Coinbase under their revenue-sharing model.

Hayes draws a comparison between Circle’s business model and Coinbase’s diversified financial services. He describes Coinbase as a mature company with multiple profitable lines of business and a global client base, whereas Circle’s single-focus on stablecoins limits its scale and diversity. Despite this, Hayes advises against shorting Circle stock, suggesting that investors who believe the Circle-to-Coinbase ratio is off should consider buying Coinbase instead. He predicts that Circle will retain value in the long term, with investors potentially regretting missed opportunities in the stablecoin market cycle.

Circle’s current positioning gives it a first-mover advantage in regulated stablecoin markets. However, Hayes remains skeptical about the long-term sustainability of current valuations against generating revenues. He points out that Circle benefits from its distribution within Coinbase, a competitive strength that newer players lack. Hayes contends that while Circle’s stock may be overvalued, it offers better capital preservation than future stablecoin IPOs that lack established distribution channels and proven business models.

Hayes foresees a wave of Circle copycats entering the market with even higher Price-to-Assets Under Custody ratios. These new issuers aim to leverage their finance sector credentials to convince investors of their capability to disrupt traditional banking. They will tout collaborations with established banks or exposure to their distribution channels as competitive advantages. Hayes predicts these pitches will be effective in raising significant capital, despite the underlying flaws in their business models relative to established players.

New stablecoin issuers face significant distribution challenges. Hayes identifies three major distribution avenues for stablecoin success: crypto exchanges, Web2 social media, or conventional banks. Without demonstrated access to these channels, new issuers have little hope of building enduring businesses. Hayes depicts the future fundraising environment as favoring shady business models, with promoters convincing public investors to invest in worse stablecoin businesses. Despite these issues, Hayes warns against shorting these overhyped stocks, expecting them to perform well under favorable market conditions.

Hayes identifies US stablecoin regulation as a critical factor in determining the scale of potential market manipulation in upcoming IPOs. Under a light-touch or minimal regulatory regime, he anticipates potential repeats of the Terra/Luna collapse scenario. New issuers could create algorithmic stablecoin schemes that function as Ponzi operations, offering high yields to holders while returns derive from leveraged asset positions rather than sustainable business operations. Increased regulatory freedom allows issuers to apply more sophisticated financial engineering techniques to hide underlying problems with their business models, creating opportunities for promoters to structure complex products that appear attractive to investors while hiding fundamental risks.

Hayes maintains a pessimistic outlook on new entrant prospects, emphasizing that distribution channel access remains the primary barrier regardless of regulatory conditions. He advises treating stablecoin stocks like volatile trading instruments rather than long-term investments. Overall, Hayes’ analysis underscores the risks and challenges associated with stablecoin-linked IPOs, urging investors to approach these opportunities with caution.